Oil fluctuates on Iran earthquake, supply build

Supply Side May Be the Final Straw

Oil prices fluctuated yesterday on lots of news and lots of supply. Worries about China’s down grade seemed to weigh a bit on market sentiment as well as worries about halted trade from Herbalife and Skechers USA. Yet an earthquake in Iran gave oil a pop and then continued to rally after stocks hit a record. But after the close, the impact of the leaking Pegasus pipeline on WTI crude supply became apparent when the American Petroleum Institute reported a whopping 5.1 million build in crude oil supply.

Oil sold off when, as reported by Reuters, “KPMG said it resigned as auditor of two U.S. corporations amid an FBI investigation into insider trading allegations involving leaked information and a former senior partner. The two California-based companies — nutritional products group Herbalife and footwear maker Skechers USA Inc — said separately on Tuesday that KPMG had quit as their auditor in connection with the leaks.” The fear of the unknown caused a drop in price as the story was unclear. After the facts came out the trade was less worried.

We also popped on the report of a 6.3 earthquake that struck close to an Iranian nuclear power plant. Traders seemed to cover shorts as it is still uncertain, and later oil seemed more in tune with the stock market rally than with Iranian production rally. Reuters reported that the, “Quake totally destroyed one village, a Red Crescent official told the Iranian Students' News Agency (ISNA), but the nearby Bushehr nuclear plant was undamaged, according to Iranian officials and the Russian company that built it.”

Then the API reported a big 5.1 million barrel crude build. But what was even more interesting was the increase in refinery runs and gasoline supply. The API reported that refinery runs hit 87.7% suggesting that the turnaround on gas and the building of supply of the summer time blends of gasoline is ahead of schedule for the upcoming summer driving season. That should lead to additional price drops in the gasoline market and confirms even further the top that I called for in February.

On the supportive side was distillates, which seem to continue to fall along as temperatures and exports continue to tighten that supply. Speaking of supply, the Energy Information Administration reported that when it comes to natural gas there will be less supply then they thought in their Short Term Energy Outlook.

In its April Short-Term Energy Outlook, the EIA said it expects marketed natural gas production in 2013 to rise by 0.21 billion cubic feet per day to a record 69.33 bcfd, down from its March estimate that output this year would be 69.6 bcf daily. If realized, it would be the third straight year of record gas production.

Natural gas did not make a 20-month high yesterday and pulled back but still closed above $4.00, the former resistance. Natural gas did get a supportive report from the EIA. As reported by the U.S. Energy Information Administration on Tuesday trimmed its estimate for growth in domestic natural gas production in 2013, but still expects output to rise 0.3% from 2012's record levels.

The EIA also lowered its estimate for production growth in 2014, but still estimates that output will gain fractionally and post a fourth straight annual record. The EIA raised its estimate for consumption growth this year, expecting demand to climb 0.73 bcf per day, or 1%, from 2012 to 70.28 bcf daily. The agency previously estimated that output in 2013 would total 70.02 bcf daily but said cold late-winter weather led to increases in natural gas used for residential and commercial space heating. EIA expects demand in 2014 to slip slightly to about 70.05 bcf daily.

Higher gas prices were expected to reduce electric power demand from the record levels last year when many utilities switched from coal to cheaper gas for power generation. Imports of liquefied natural gas (LNG) should remain at minimal levels of less than 0.5 bcfd in both 2013 and 2014 as global shippers continue to send more gas to higher-paying markets in Europe and Asia. EIA forecast Henry Hub natural gas prices in 2013 to average $3.52 per million British thermal units, up about 28% from 2012's estimated average of $2.75.In 2014, EIA expects gas prices to rise 8 cents, or 2.3%, to $3.60 per mmBtu.

Still I am more bullish than the EIA. I think that demand for natural gas will exceed their forecasts as power generators will turn away from coal faster than almost anyone thinks. At the same time we should put in a bit of a seasonal storm premium. Market Watch reported that a, “Weather forecaster predicted another active hurricane season this year, with warm tropical Atlantic Ocean temperatures sounding an early alarm.” Hurricane season doesn’t start until June 1 but folks at Weather Services International, the professional division of the Weather Channel, noted an “unusually amplified” jet stream caused a sharp increase in sea surface temperatures in the tropical North Atlantic, the breeding grounds of hurricanes. Gulf of Mexico hurricanes routinely close down energy exploration and production there. WSI forecast 16 named tropical storms, nine hurricanes, and five “intense hurricanes” this year. That compares with a season average of 12 named storms, seven hurricanes, and three big ones between 1950 and 2012. Specifying which coastal regions will be under threat this year is difficult, but at least one hurricane has made landfall somewhere along the U.S. coast in 80% of the seasons and 43% of the seasons had multiple hurricane landfalls, WSI said.

Hurricane Sandy killed more than 100 people in the U.S. and destroyed large swaths of the East Coast in late October. Hurricane season lasts through the end of November. East coast refineries, however, rode the storm and its aftermath with relative little damage.

Maybe so but it did lead to that gasoline price spike in February!

About the Author

Senior energy analyst at The PRICE Futures Group and a Fox Business Network contributor. He is one of the world's leading market analysts, providing individual investors, professional traders, and institutions with up-to-the-minute investment and risk management insight into global petroleum, gasoline, and energy markets. His precise and timely forecasts have come to be in great demand by industry and media worldwide and his impressive career goes back almost three decades, gaining attention with his market calls and energetic personality as writer of The Energy Report. You can contact Phil by phone at (888) 264-5665 or by email at pflynn@pricegroup.com. Learn even more on our website at www.pricegroup.com.

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